Thursday, 23 January 2014

The UK think tank Policy Exchange has just released the Help to Save report proposing pension system improvements. It contains some interesting ideas, primarily private-sector oriented measures. Here is what they propose [my comments in brackets]:

1. Replace auto-enrolment with compulsory membership of a pension schemesfor all those earning more than the tax free personal allowance. [They want the State to be on the hook as little as possible. Auto-enrolment, which is already in place in the UK for large employers, gets most people in, but the other 10% who opt out are still a problem. People could only opt out if they had enough savings]2. Increase the minimum contribution rate to 12% from 8% phased in over 5 years. [This is over and above the deductions for CPP-equivalent State pension. If you live and are retired a long time, you need to save plenty]3. Make the annuity market more competitive by issuing government annuity bonds. Individuals could buy their initial interest rate exposure from the government with insurers providing annuity insurance only for when this expired. [Instead of the traditional bond that pays interest coupons and re-pays the principal at maturity, the bond would pay back both interest and principal throughout and nothing at the end. These bonds, which would not have mortality credits that insurance company annuities do, would provide a lower bound on annuity prices, thus forcing better private sector annuity pricing. They could be inflation-linked too.]4. Allow up to 50% of the minimum income requirement to be funded through non annuity products such as income drawdown. The drawdown should be limited to the yield on the relevant fund to limit the risk of fund exhaustion. [Their example is to extract dividend yield, which is relatively stable and grows over time - e.g. some ETFs in Canada, from a market equity fund]5. Encourage a greater focus on asset allocation through the promotion of outcome oriented investment funds. [Simple target date funds didn't do well through the 2001 Tech meltdown and the 2008 financial crisis]6. Encourage the development of Super Trusts, which would be large enough to generate economies of scale, have a better diversification of assets and greater use of asset allocation. [Super Trusts would invest kinda like the CPP, infrastructure, alternative assets etc, except be private sector]7. Cap fees at 1% not 0.75% in order to keep a wide choice of funds available to pension fund investors [hah! Canadian RRSP mutual fund investors can only dream of 1% fees]

So pension reform in Canada might not need to be CPP expansion, just something that has many of its key features - mandatory participation, employer and employee contributions, full funding by the individual who benefits, good governance, lower controlled fees, large scale management with wider investment scope, sustainable managed retirement phase decumulation income.

Wednesday, 22 January 2014

One of the problems with studies like the one The Canadian Centre for Policy Alternatives' Hugh Mackenzie has come out with, All in a Day's Work? (CEO Pay in Canada), is that it tars all companies and their executives with the same black brush. As I compiled the data to do some posts (Over-paid CEOs, Fairly-paid CEOs) on my other blog about the really bad (at least from an investor's viewpoint) companies and some good companies, there was some data that I did not use on the pay received by the companies' Named Executive Officers (NEOs) i.e. the top managers.

The Data
My data looks at the change between 2007, in the heady good time just before the financial crisis and the stock market was at a peak, to 2012. So it isn't taking a market low for stock prices that company executives could easily beat just by hanging around through the recovery.

There are 39 companies in the table, a mix of big ones, such as are in Mackenzie's list (8 of his top 10), but also smaller ones. It was not scientifically systematic or randomly chosen, I was looking for especially good or bad performers.

Lots of companies with high rates of pay increases ... but what about ...
Executive pay in companies as a whole rose at 12.9% annualized. That's far above inflation of 1.73% (cf Bank of Canada Inflation Calculator). Is that bad when total stock return has reached 11.2% for the TSX 60, or an unweighted 29% total return average for our good and bad companies?

Some falling pay companies!
Four companies even had falling NEO pay - Cott, Potash Corp, Keyera and CNR (goodbye Hunter Harrison) - while investor returns beat the market. Is that a good deal for an investor or what?

More good companies than bad
Most of the companies with high executive pay increases have given shareholders much more in return as shown by those above the Red line of shame. Below the line it sure looks to me that executive pay is out of control and out of whack with investor returns.

Maybe the balance would be different if I had the patience to plow through all Sedar Proxy Circular filings (which is where the data comes from) of the 241 companies in the S&P / TSX Composite Index. But my sample is fairly large. A number of the worst over-paid stinkers like Niko, Blackberry, Barrick Gold and EnCana are not even in the above table.

Poor value for pay is a relative term
Some companies below the line on the over paid-list have had excellent stock returns, like CP and B2Gold but the executive pay has risen so much faster. Other companies like Shaw have had more modest, though still well ahead of inflation, pay rises, but stock returns have been weaker, or even negative, like Agnico-Eagle Mines.

Some might like to put SNC Lavallin below the line for poorer than market returns since executive pay has still gone up double inflation but I measure fairness in terms of stock return vs pay rise, 8% vs 4% in this case.

Tuesday, 21 January 2014

Blogger Robb Engen at Boomer and Echo received some darts from a mutual fund industry representative recently for recommending that investors switch to index mutual funds or ETFs. He defends himself quite well but there is one line argument he has not pursued.

The mutual funds industry says investors with mutual funds get savings discipline from their advisor and they end up with more savings than households who do not receive advice as a result. Ok, turn that around, how do people with high savings, the wealthy, invest? How do investors who use ETFs fit on the wealth ladder? It seems that no one has actually done large scale survey studies. But some evidence points to ETF investors being even better off. ETF Trends' High Net Worth Investors Adopting ETFs reported on a Spectrum study of US investors in July 2013 that found that the higher up the wealth scale, the more the investors own ETFs. An older 2010 study on Canadian high net worth investors ($500k+ investable assets) from ETF provider BlackRock (which admittedly raises the same concerns about bias as do mutual fund studies from that industry) found that the majority of HNW investors favour ETFs over mutual funds. The HNW investors, apparently unlike the hoi polloi LNW investors who look to their mutual fund advisors for "savings discipline" according to IFIC's justification for high mutual fund fees, look to their advisors "... to help manage risk and provide counsel on investment products they have not considered". The HNW felt it important that the advisors put client interest first. Unbiased advice is key.

A second key element is the actual investment expertise of the advisor. To a large degree the attitude of younger investors cited by BlackRock rings true to me: "61 per cent of HNW investors under 35 years of age felt that advisors provide no better information or advice than can be found on the Internet for free". The reason is two-fold. First, basic investing success is not rocket science - simple model portfolios, one-minute portfolios with yearly rebalancing do an adequate job. Second, the more sophisticated investing, the rocket science of finding extra return and controlling better various risks, such as I believe is possible with smart beta ETFs, post simple-beta portfolio management (the kind Jacques Lussier writes about in Successful Investing is a Process) along with tax management is not expertise I would expect to find often amongst mutual fund sales people / advisors. They don't have the training and the knowledge, let alone the motivation.

Monday, 20 January 2014

It is now three and half years since we started a realistic contest between a traditional cap-weighted portfolio and another based on fundamental factors. The live updated prices are shown in the spreadsheets at the bottom of this blog, though I only update the distributions every six months or so, which means the cash balance is not constantly up-to-date. Today, I've updated distributions up to and including December 2013.

Both portfolios performing well
The fundamental portfolio value is up 37.9% since June 2010 inception to $137,901. The cap-weighted portfolio has risen 36.8% to $136,821. This is the largest difference since the start. The plunging Canadian dollar has given a boost to both portfolios since the last update in August.

More idle cash from cap-weighted portfolio
The latest year-end distributions from the various cap-weight ETFs have been a fair bit more than what the fundamental ETFs generated. This is despite the fact that the Canadian equity cap-weight ETF, the Horizons HXT, makes no distributions at all due to its construction as a swap. Whether the higher cash distribution is due to the higher MERs of the fundamental ETFs chewing up cash or is caused by the portfolio holdings with different dividends I cannot tell. In the meantime though, the cash sits idle, not invested, which is not the objective of the portfolio. By June, there should be enough cash to justify reinvestment and rebalancing purchases, considering trading costs, as stated in the rules set out for the portfolios at start-up. None of the holdings is currently beyond the policy limit of one quarter away from its target weight that would force immediate rebalancing.

Developed and Emerging equities will determine the winner?
Google Finance charts show that, up to now at least, the Canadian and US battling ETFs seem to track each other quite closely. It's the developed and emerging market equity ETFs that seem to follow much more different paths of ups and downs. Witness this chart of developed market ETFs VEU vs PXF since our portfolio launch.

Monday, 13 January 2014

HSBC has conducted a series of surveys on what people around the world, including Canada, think about retirement. Among the interesting findings:

#1 Advice from those retired in Life after work: "Start saving at an early age", closely followed by "Don’t spend what you don’t have" and then "Start saving a small amount regularly". Clearly successful retirement planning is rocket science. Some not very common advice: "Stick to low/lower risk savings" and "Try high/higher return investments".

#1 Reason non-savers are not saving for retirement in A new reality: "All my money goes into living day-to-day" ... but another chart (copied below) from the same report finds that saving for a holiday is as important as saving for retirement. Hmm, so what exactly are those essential day to day expenses people think of when they say they cannot contribute to their RRSP?

#1 Policy desire by Canadians for what the government should do to help people prepare for retirement in Investing in later life: "Enforce additional private savings". Yet another survey in 2009 seemed to find the opposite opinion as 48% favoured what looks like a voluntary approach: "Encourage more private savings through tax relief on savings". Perhaps this is why the government is sitting on the fence?